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Multiple benefits in early bond issue

Gov’t to seek return to money markets before the European elections for political and financial purposes By Dimitris Kontogiannis

Greece has come a step closer to obtaining partial access to the international money markets, following the drop of its benchmark 10-year bond yield to below 7 percent for the first time since the country requested a bailout in May 2010. So it will come as no surprise if it taps the market by early May or even earlier, assuming current talks with the troika on the pending review are concluded. This long-awaited event has a political symbolism but it is also important for the economy.

The rally in euro-periphery state bonds has brought yields to multi-year lows and helped push the yield of the country’s 10-year bonds as low as 6.78 percent in intraday trading last week. Whether the ongoing crisis in Ukraine has contributed to the rise in bond prices and the accompanied compression of yields, as some claim, it is not yet clear. However, being a high yielder in the eurozone cannot be ignored by institutional funds focusing on high risk-high return fixed-income investments. Still, it is impressive to see the return to maturity of the same Greek bond fall to just below 7 percent last Friday from 8.50 percent in January, with some analysts seeing sliding down to 6.50 percent or below in the next couple of months.

This is good news for the Greek side, which has been eager to test the markets for quite some time since it is convinced a successful bond issue would help accelerate the slide of yields and boost market and business confidence in the country’s ability to stand on its feet.

Also, this time around, it looks as if local authorities have the green light from the troika to test the waters. A number of high-level Greek government officials have already signaled their intention to come out with a five-year bond issue because they want to start building a yield curve and the five-year yield is missing right now. Of course Finance Minister Yannis Stournaras has said in the past that the country may tap the markets in the second half of 2014 but this can change due to market conditions and other developments.

Since it is the first issue since the bailout, one would expect the five-year bond to raise a net amount, ranging between 1.5 and 2.5 billion euros, and will likely be offered via either a syndicated loan or private placement. Judging from recent statements from Alternate Finance Minister Christos Staikouras, one should also expect Greece to take action to boost the liquidity of the five-year bond issue. This could take the form of a swap between additional newly issued five-year bonds and long-dated bonds expiring beyond 2023, meaning the total outstanding amount of these bonds may reach or exceed 4 billion euros.

It is noted investors prefer liquid bonds because they can buy and sell them at relatively large amounts in the secondary market without causing large swings in prices and yields. The price of a fixed coupon bond moves inversely with its yield.

Of course, the issuance will represent a milestone in the Greek and eurozone debt crisis and will help partially fill this year’s funding gap, estimated at around 4.5 billion euros. Assuming the market reception of the five-year bond issue is good and yields decline further in the secondary market, one would expect the country to reopen the bond issue later and raise an additional sum to fully cover the 2014 funding gap. The amounts are very small to make the difference in the sustainability of Greek debt even if the bond carries an average yield between 5 and 6 percent. Moreover, a strong appetite for the five-year bond will show that factors other than the sustainability of the debt are more important from the markets’ point of view.

There is no question the coalition government is eager for the country to obtain market access before the elections for the European Parliament for political reasons. From its point of view, the bond issue will signal the beginning of the end of the austerity policies which are blamed for driving unemployment to 28 percent and suppressing disposable incomes by 35 percent on average according to government officials. It will also signal that the country is becoming less dependent on EU-IMF loans. So, it has very strong political symbolism and can counter accusations from opposition parties that the government is responsible for implementing the troika’s dictated policies with its awful social results.

However, the economic importance of the five-year bond issue should not be underestimated. If the state starts borrowing on international markets, it will make it easier for Greek corporations to do the same at cheaper interest rates than otherwise. Some large firms have already taken advantage of favorable market conditions to tap the markets, albeit at high yields. This will help them diversify their funding sources away from Greek banks, which in turn will be able either to deleverage faster or/and loan out to other firms and households. All of these actions will have a beneficial effect on the economy, which is projected to register an anemic growth rate of 0.4 to 0.6 percent this year for the first time since 2008.

Greece’s likely attempt to access the bond markets for the first time since May 2010, a month before the bailout, will be good news for the country and the eurozone in general. In some respects, it is the watershed event, marking the end of the eurozone debt crisis, even though a number of important issues, relating to the architecture of EMU, have yet to be resolved. However, it is more important for the Greek economy and the people, who may see a glimpse of light at the end of the channel.